A Causal Linkage: Corporate Debt and Sovereign Spreads

Jun Hee Kwak ()
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Jun Hee Kwak: College of Economics, Sogang University

Empirical Economics, 2025, vol. 68, issue 4, No 3, 1567-1611

Abstract: Abstract This study shows that corporate debt accumulation during credit booms can explain increases in sovereign risk during stress periods. Using detailed firm-level database across six Eurozone countries, I construct granular instruments for aggregate corporate leverage. Instrumental variable regressions indicate that rising corporate leverage causally increases sovereign spreads in Eurozone countries during the debt crisis period of 2010-2012. This result provides the first empirical evidence on the causal link between corporate debt and sovereign debt crises. Additionally, firm-level evidence suggests that highly leveraged firms are likely to pay fewer taxes to the government, contributing to the rise in sovereign risk. (JEL F34, F41, G32, L11)

Keywords: Financial Crisis; Corporate Debt; Sovereign Risk; Granular Instrument; Identification (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-024-02683-z

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